OSFI issued an update to the July 18, 2020 capital ruling on whether to recognize the Limited Recourse Capital Notes (LRCNs) issued by a federally regulated financial institution as Additional Tier 1 capital. The revised ruling addresses LRCN issuance from institutions of all sizes and across industry sectors. The revisions include a number of clarifications to the ruling’s conditions and limitations, which are part of the prudent approach of OSFI to assess the quality and quantity of financial instruments used as regulatory capital. The ruling continues to conclude that federally regulated financial institutions may recognize the LRCNs as regulatory capital subject to the capital treatment, conditions, and limitations set out in the revised ruling.
OSFI assessed the LRCNs and the underlying preferred shares held by the special purpose vehicle, or SPV, both individually and in combination relative to the eligibility criteria set out in Chapter 2 of the Capital Adequacy Requirements Guideline. OSFI concluded that the LRCN structure meets all of the criteria to be recognized as Additional Tier 1 regulatory capital. The LRCNs can only be issued to institutional investors or, in the case of closely-held federally regulated financial institutions, to affiliates; they can only be issued in minimum denominations of at least $200,000 and integral multiples of $1,000 in excess thereof. The LRCN issuance cap for authorized deposit-taking institutions has been set at greater of $150 million, 0.75% risk-weighted asset (RWA), or 50% of the institution’s aggregate net Additional Tier 1 capital, with a floor of lesser of 0.30% RWA or 20% of the institution’s aggregate Additional Tier 1 capital. LRCNs issued in excess of the Cap may be counted toward Tier 2 capital, subject to any applicable Tier 2 capital composition limits. However, the Cap may be removed with the prior approval of the Capital Division of OSFI.
Keywords: Americas, Canada, Banking, LRCN, Limited Recourse Capital Notes, Additional Tier 1 Capital, Regulatory Capital, Basel, CAR Guideline, OSFI
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